Tuesday, March 03, 2015

The unfulfilled promise of tax credits as economic policy: The relative paucity of the modern welfare state in the United States is a well-known fact among researchers. Compared to rich countries in Europe, the United States spends far less on social insurance programs and other social programs such as education. But these large disparities decrease once the private-sector side of the U.S. welfare state is included in the analysis. Yale University professor Jacob Hacker calls this the “divided welfare state,” where in many instances the U.S. tax code is now the main vehicle for social policy in retirement, college savings, and housing.

How well has this “submerged state” worked? At least in these three areas, the effectiveness of the tax code, via deductions and credits, is questionable. Consider the state of the private-sector retirement system in the United States. .... Or consider the submerged state approach to high college tuitions. ... The mortgage-interest tax deduction is another example of policy being run through the tax code. ...

To be sure, the creation of this network of tax credits and tax expenditures wasn’t without reason. Political realities necessitated the use of the tax code to achieve these ends. And these programs have done real good. But as the evidence shows, they are far from optimal.

The record of using the tax code to do tasks traditionally associated with the welfare state is clearly mixed. At best, it works like a Rube Goldberg machine that attacks a problem by hoping that a chain reaction will do the job. At worse, the machine doesn’t work for the broad majority of the population. The relevant question is now how to re-engineer it for future, more efficient use.

First, any attempt to estimate the impact of a policy change on G.D.P. requires an economic model. Because reasonable people can disagree about what model, and what parameters of that model, are best, the results from dynamic scoring will always be controversial. ...

Third, dynamic scoring matters most over long time horizons. Some policy changes, such as those aimed at encouraging capital investments, take many decades to have their full impact on economic growth. Yet congressional budgeting usually looks only five or 10 years ahead. ...

So there are good reasons for the economists hired by Congress to pursue dynamic scoring. But there are also good reasons to be wary of the endeavor. ...

Another worry is the politicization of the CBO. See here and here. Also see here and here on the application of dynamic scoring to things such as Head Start and infrastructure spending.

First, any attempt to estimate the impact of a policy change on G.D.P. requires an economic model. Because reasonable people can disagree about what model, and what parameters of that model, are best, the results from dynamic scoring will always be controversial. Just as many Republicans are skeptical about the models of climatologists when debating global warming, many Democrats are skeptical about the models of economists when debating tax policy.

My read of the article was going just fine until the climate model analogy. Two assumptions are made:

All economists agree on "the models of economists"

Reasonable people can disagree about climatology models

In terms of #1, there is significant disagreement amongst economists about macroeconomic models (i.e., have you read Krugman lately?). In terms of #2, science is different than social science. Climatology involves forecasts so it is different than tests of the law of gravity, but still, ninety-x percent of climate scientists agree. That is a bit higher than the number of economists who agree on anything macro.

My stance is that we should accept that the earth is likely warming and people contribute to it (even the U.S. Senate, including those Republicans that Mankiw mentions [did he miss that vote?], overwhelming thinks so). That moves us to the debate on whether we should do anything it or learn to adapt. I think that reasonable people can disagree on that second question.

Monday, February 23, 2015

Knowledge Isn’t Power, by Paul Krugman, Commentary, NY Times: ... Just to be clear: I’m in favor of better education. Education is a friend of mine. And it should be available and affordable for all. But ... people insisting that educational failings are at the root of still-weak job creation, stagnating wages and rising inequality. This sounds serious and thoughtful. But it’s actually a view very much at odds with the evidence, not to mention a way to hide from the real, unavoidably partisan debate.

The education-centric story of our problems runs like this: We live in a period of unprecedented technological change, and too many American workers lack the skills to cope with that change. This “skills gap” is holding back growth, because businesses can’t find the workers they need. It also feeds inequality, as wages soar for workers with the right skills... So what we need is more and better education. ...

It’s repeated so widely that many people probably assume it’s unquestionably true. But it isn’t..., there’s no evidence that a skills gap is holding back employment...

Finally, while the education/inequality story may once have seemed plausible, it hasn’t tracked reality for a long time..., the inflation-adjusted earnings of highly educated Americans have gone nowhere since the late 1990s.

So what is really going on? Corporate profits have soared as a share of national income, but there is no sign of a rise in the rate of return on investment..., it’s what you would expect if rising profits reflect monopoly power rather than returns to capital... — all the big gains are going to a tiny group of individuals holding strategic positions in corporate suites or astride the crossroads of finance. Rising inequality isn’t about who has the knowledge; it’s about who has the power.

Now, there’s a lot we could do to redress this inequality of power. We could levy higher taxes on corporations and the wealthy, and invest the proceeds in programs that help working families. We could raise the minimum wage and make it easier for workers to organize. It’s not hard to imagine a truly serious effort to make America less unequal.

But given the determination of one major party to move policy in exactly the opposite direction, advocating such an effort makes you sound partisan. Hence the desire to see the whole thing as an education problem instead. But we should recognize that popular evasion for what it is: a deeply unserious fantasy.

Sunday, February 22, 2015

Helicopter money and the government of central bank nightmares: If Quantitative Easing (QE), why not helicopter money? We know helicopter money is much more effective at stimulating demand. Helicopter money is a form of what economists call money financed fiscal stimulus (MFFS). In their current formulation independent central banks (ICB) rule out MFFS, because the institution that can do the stimulus (the government) is not allowed to cooperate on this with the institution that creates money (the ICB). In a world where governments - through ignorance or design - obsess about deficits when they should not, it turns out that MFFS or helicopter money is all we have left to prevent large negative demand shocks leading to deep and prolonged recessions. So why is it taboo?

One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers. QE gives them that asset, but helicopter money does not. The nightmare (as ever with ICBs) is not the current position of deficient demand, but a potential future of excess inflation that they are unable to control. .... Helicopter money ... puts money into the system at the ZLB, in a much more effective way than QE, but it cannot be put into reverse by central banks alone. The central bank cannot demand we pay helicopter money back. [4]

If the government cooperates, this is no problem. The government just ‘recapitalises’ the central bank, by either raising taxes or selling more of its own debt. Economists call this ‘fiscal backing’ for the central bank. In either case, the government is taking money out of the system on the central bank’s behalf. So the nightmare that makes helicopter money taboo is that the government refuses to do this. [1] ...

After explaining, he concludes

So this nightmare that makes helicopter money taboo is as unrealistic as most nightmares. The really strange thing is that ICBs have already had to confront this nightmare. It is more than possible that when central banks sell back their QE assets, they will make a loss, and so will be faced with exactly the same problem as with helicopter money. [3] A central banker knows better than not to worry about something because it might not happen. So the nightmare has already been faced down. It therefore seems doubly strange that the taboo about helicopter money remains. ...

Greece Did OK: Now that the dust has settled a bit, we can look calmly at the deal — if it really is a deal that survives through tomorrow, which some people doubt. And it’s increasingly clear that Greece came out in significantly better shape, at least for now.

The main action, always, involves the Greek primary surplus — how much more will they need to raise in revenue than they can spend on things other than interest? The question these past few days would be whether the Greeks would be forced into agreeing to aim for very high primary surpluses under the threat of being pushed into immediate crisis. And they weren’t. ...

Right now, Greece has avoided a credit cutoff, and worse yet an ECB move to pull the plug on its banks, and it has done so while getting the 2015 primary surplus target effectively waived.

The next step will come four months from now, when Greece makes its serious pitch for lower surpluses in future years. We don’t know how that will go. But nothing that just happened weakens the Greek position in that future round. ...

So Greece has won relaxed conditions for this year, and breathing room in the run-up to the bigger fight ahead. Could be worse.

Mr. Walker, in what was clearly a rite of passage into serious candidacy, spoke at a dinner at Manhattan’s “21” Club hosted by the three most prominent supply-siders: Art Laffer...; Larry Kudlow...; and Stephen Moore... Politico pointed out that Rick Perry, the former governor of Texas, attended a similar event last month. Clearly, to be a Republican contender you have to court the powerful charlatan caucus.

So a doctrine that even Republican economists consider dangerous nonsense has become party orthodoxy. And what makes this political triumph especially remarkable is that it comes just as the doctrine’s high priests have been setting new standards for utter, epic predictive failure.

I’m not talking about the fact that supply-siders didn’t see the crisis coming,... the people Mr. Walker was courting have spent years warning about the wrong things. “Get ready for inflation and higher interest rates” was the title of a June 2009 op-ed ... by Mr. Laffer; what followed were the lowest inflation in two generations and the lowest interest rates in history. Mr. Kudlow and Mr. Moore both predicted 1970s-style stagflation. ...

So what does it say about the current state of the G.O.P. that discussion of economic policy is now monopolized by people who have been wrong about everything, have learned nothing from the experience, and can’t even get their numbers straight?

The ... modern American right seems to have abandoned the idea that there is an objective reality out there... What are you going to believe, right-wing doctrine or your own lying eyes? These days, the doctrine wins.

Look at another issue, health reform. ... Then there’s foreign policy. ... And don’t get me started on climate change.

Along with this denial of reality comes an absence of personal accountability. If anything, alleged experts seem to get points by showing that they’re willing to keep saying the same things no matter how embarrassingly wrong they’ve been in the past.

But let’s go back to those economic charlatans and cranks: Clearly, failure has only made them stronger, and now they are political kingmakers. Be very, very afraid.

Monday, February 16, 2015

The Congressional Reserve Board: A Really Bad Idea: “We are – I’ll be blunt – audited out the wazoo. Every Federal Reserve Bank has a private auditor. We have our auditor of the system. We have our own inspector general. We are audited. What he’s talking about is politicizing monetary policy.” Richard Fisher, President, Federal Reserve Bank of Dallas, Dallas Morning News, February 9, 2015.

What would you think if you were to open your morning newspaper to find the following headline?

“Congress Closes Down Fed, Takes Over Monetary Policy”

If you’re like us, you’d panic. In short order, you’d think that long-term inflation expectations would rise, pushing bond yields higher. You’d anticipate an increase in the volatility of growth, employment and inflation. That more volatile environment would drive up the risk premium required on new investments, hindering long-term economic growth. Finally, you'd be very worried about how these Congressional policymakers would manage the next financial crisis.

This is not a pretty picture. Why would anyone want it to become a reality? Well, these are surely not the intended goals, but they are the likely outcomes should lawmakers ever replace the Federal Reserve Board with what we would call a Congressional Reserve Board.

While the Federal Reserve Transparency Act of 2015 – aka, the “Audit the Fed” Act – doesn’t shut down the Federal Reserve, it would go a long way to putting Congress directly in charge of monetary policy and to weakening the Fed’s effectiveness as a lender of last resort.

To explain our concerns, we will start by describing why it has become almost universally accepted practice to make the institution setting monetary (and regulatory) policy independent of political interference. That is, why most advanced and emerging market economies have opted to make their central banks “independent.” We will also explain why the “Transparency Act” is really about controlling monetary policy, not about making the Fed accountable (the short answer: it already is). And, finally, we will explain the bill’s impact on the Fed’s lender of last resort powers. ...

Conservatives are known for hating taxes but particularly hate income taxes, which they say have a greater dampening effect on growth. Of the 10 or so Republican governors who have proposed tax increases, virtually all have called for increases in consumption taxes, which hit the poor and middle class harder than the rich.

Favorite targets for the new taxes include gasoline, e-cigarettes, and goods and services in general (Governor Paul LePage of Maine would like to start taxing movie tickets and haircuts). At the same time, some of those governors — most notably Mr. LePage, Nikki Haley of South Carolina and John Kasich of Ohio — have proposed significant cuts to their state income tax. ...

Money Makes Crazy, by Paul Krugman, Commentary, NY Times: Monetary policy probably won’t be a major issue in the 2016 campaign, but it should be. It is, after all, extremely important, and the Republican base and many leading politicians have strong views about the Federal Reserve and its conduct. And the eventual presidential nominee will surely have to endorse the party line.

So it matters that the emerging G.O.P. consensus on money is crazy — full-on conspiracy-theory crazy. ...

So monetary crazy is pervasive in today’s G.O.P. But why? Class interests no doubt play a role — the wealthy tend to be lenders rather than borrowers, and they benefit at least in relative terms from deflationary policies. But I also suspect that conservatives have a deep psychological problem with modern monetary systems.

You see, in the conservative worldview, markets aren’t just a useful way to organize the economy; they’re a moral structure: People get paid what they deserve, and what goods cost is what they are truly worth to society. ...

Modern money — consisting of pieces of paper or their digital equivalent that are issued by the Fed, not created by the heroic efforts of entrepreneurs — is an affront to that worldview. Mr. Ryan is on record declaring that his views on monetary policy come from a speech given by one of Ayn Rand’s fictional characters. And what the speaker declares is that money is “the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. ... Paper is a check drawn by legal looters.”

Once you understand that this is how many conservatives really think, it all falls into place. Of course they predict disaster from monetary expansion, no matter the circumstances. Of course they are undaunted in their views no matter how wrong their predictions have been in the past. Of course they are quick to accuse the Fed of vile motives. From their point of view, monetary policy isn’t really a technical issue, a question of what works; it’s a matter of theology: Printing money is evil.

So as I said, monetary policy should be an issue in 2016. Because there’s a pretty good chance that someone who either gets his monetary economics from Ayn Rand, or at any rate feels the need to defer to such views, will get to appoint the next head of the Federal Reserve.

Thursday, February 12, 2015

The Austerity Con: ‘The government cannot go on living beyond its means.’ This seems common sense, so when someone puts forward the view that just now austerity is harmful, and should wait until times are better, it appears fanciful and too good to be true. Why would the government be putting us through all this if it didn’t have to?

By insisting on cuts in government spending and higher taxes that could easily have been postponed until the recovery from recession was assured, the government delayed the recovery by two years. And with the election drawing nearer, it allowed the pace of austerity to slow, while pretending that it hadn’t. Now George Osborne is promising, should the Tories win the election in May, to put the country through the same painful and unnecessary process all over again. Why? Why did the government take decisions that were bound to put the recovery at risk, when those decisions weren’t required even according to its own rules? How did a policy that makes so little sense to economists come to be seen by so many people as inevitable? ...

Wednesday, February 11, 2015

Paul Krugman’s Feb. 2 column, “The Long-Run Cop-Out,” claims that we don’t need to deal with our long-term fiscal challenges any time soon, and that those who argue otherwise are lazy and lacking in courage. His message is a disservice to the critically important debate about our nation’s economic future. ...

Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery.

Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration. In our report we recommended delaying significant budget cuts until the economy recovered, and implementing reforms gradually. ...

Does anyone remember Bowles or his associates objecting strenuously to the sequester, getting out in public forums and arguing it was a big mistake? Writing letters and op-eds to the NY Times, that sort of thing? I don't (and see Dean Baker below on this point - Update: from a Tweet by @BowlesSimpson, see here, but I don't see them calling for delay until the economy recovers, only for a different type of austerity, e.g. "simply waiving this sequester — or coming up with some agreement to spend partway between pre- and post-sequester levels — would represent a huge failure. It would send a message to creditors and citizens alike that Washington is not serious about the national debt and that even when lawmakers put in place mechanisms to force seriousness, they will simply vote later to evade them. Deal with the deficit President Barack Obama and Congress have a responsibility to put politics aside and work quickly to replace sequestration and put our fiscal house in order with targeted cuts and real reforms in both the entitlement programs and the tax code.").

As for the budget projections, I'm old enough to remember a time not so long ago when the main worry was what to do about the budget surplus that would begin accumulating (e.g. how could the Fed conduct monetary policy if the supply of T-Bills dried up?). We have no idea what the budget will look like 10 or 15 years from now (unless you have suddenly started to believe that economists have the ability to make accurate forecasts even a year ahead, let alone a decade or more). That's why Krugman said:

It’s true that many projections suggest that our major social insurance programs will face financial difficulties in the future (although the dramatic slowing of increases in health costs makes even that proposition uncertain). If so, at some point we may need to cut benefits. But why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits?

Dean Baker also responds:

Erskine Bowles Is Back and Still Pushing Austerity: Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to "put our fiscal house in order." He apparently hasn't been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)

Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.

Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.

In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don't earn enough to provide them with a comfortable upbringing.

You might think our failure to reduce debt ratios shows that we aren’t trying hard enough — that families and governments haven’t been making a serious effort to tighten their belts, and that what the world needs is, yes, more austerity. But we have, in fact, had unprecedented austerity. ...

All this austerity has, however, only made things worse — and predictably so, because demands that everyone tighten their belts were based on a misunderstanding of the role debt plays in the economy. ...

Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer). True, debt can pose a threat to financial stability — but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression.

Which brings us to current events, for there is a direct connection between the overall failure to deleverage and the emerging political crisis in Europe.

European leaders completely bought into the notion that the economic crisis was brought on by too much spending, by nations living beyond their means. The way forward, Chancellor Angela Merkel of Germany insisted, was a return to frugality. Europe, she declared, should emulate the famously thrifty Swabian housewife.

This was a prescription for slow-motion disaster. European debtors did, in fact, need to tighten their belts — but the austerity they were actually forced to impose was incredibly savage. ...

Suffering voters put up with this policy disaster for a remarkably long time, believing in the promises of the elite that they would soon see their sacrifices rewarded. But as the pain went on and on... Anyone surprised by the left’s victory in Greece, or the surge of anti-establishment forces in Spain, hasn’t been paying attention.

Nobody knows what happens next, although bookmakers are now giving better than even odds that Greece will exit the euro. Maybe the damage would stop there, but I don’t believe it — a Greek exit is all too likely to threaten the whole currency project. And if the euro does fail, here’s what should be written on its tombstone: “Died of a bad analogy.”

Monday, February 02, 2015

Focusing on the long-run and avoiding the harder, more important short-run questions is "craven and irresponsible"

The Long-Run Cop-Out, by Paul Krugman, Commentary, NY Times: On Monday, President Obama will call for a significant increase in spending, reversing the harsh cuts of the past few years. He won’t get all he’s asking for, but it’s a move in the right direction. And it also marks a welcome shift in the discourse. ... It’s often said that the problem with policy makers is that they’re too focused on the next election, that they look for short-term fixes while ignoring the long run. But the story of economic policy and discourse these past five years has been exactly the opposite.

Think about it: Faced with mass unemployment and the enormous waste it entails, for years the Beltway elite devoted almost all their energy not to promoting recovery, but to Bowles-Simpsonism — to devising “grand bargains” that would address the supposedly urgent problem of how we’ll pay for Social Security and Medicare a couple of decades from now.

And this bizarre long-termism isn’t just an American phenomenon. ...

Am I saying that the long run doesn’t matter? Of course not, although some forms of long-termism don’t make sense even on their own terms. Think about the notion that “entitlement reform” is an urgent priority..., why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits?...

All too often, or so it seems to me, people who insist that questions of austerity and stimulus are unimportant are actually trying to avoid hard thinking about the nature of the economic disaster that has overtaken so much of the world.

And they’re also trying to avoid taking a stand that will expose them to attack. Discussions of short-run fiscal and monetary policy are politically charged. ... I understand why it’s tempting to dismiss the whole debate and declare that the really important issues involve the long run. But while people who say that kind of thing like to pose as brave and responsible, they’re actually ducking the hard stuff — which is to say, being craven and irresponsible. ...

So it’s important to understand who’s really irresponsible here. In today’s economic and political environment, long-termism is a cop-out, a dodge, a way to avoid sticking your neck out. And it’s refreshing to see signs that Mr. Obama is willing to break with the long-termers and focus on the here and now.

Saturday, January 31, 2015

Bad Tayloring: Since they aren’t currently able to demand a return to the gold standard — and maybe a ban on paper money? — Republicans are pushing to mandate that the Fed follow the so-called Taylor rule, which relates short-term interest rates to unemployment (and/or the output gap) and inflation. John Taylor, not surprisingly, likes this idea. But it’s a really terrible idea, and not just for the reasons Tony Yates describes. ...

The world has turned out to be a much more dangerous place than Taylor-rule enthusiasts imagined, so why impose a rule devised, we know now, by economists who completely misjudged the risks?

Now Taylor himself has an excuse and rationale: he claims that the whole financial crisis thing was because the Fed departed slightly from his version of the rule in the pre-crisis 2000s. But as Yates points out, this assigns an importance to monetary policy that is wildly at odds with the kind of modeling used to justify the rule in the first place. It also, as Yates does not point out, has the distinct whiff of someone inventing ever-more bizarre stories to avoid admitting having been wrong about something. This is not the kind of argument on which to base rules that permanently constrain policy.

Friday, January 30, 2015

Europe’s Greek Test, by Paul Krugman, Commentary, NY Times: ... Recent events in Greece pose a fundamental challenge for Europe: Can it get past the myths and the moralizing, and deal with reality in a way that respects the Continent’s core values? If not, the whole European project — the attempt to build peace and democracy through shared prosperity — will suffer a terrible, perhaps mortal blow. ...

...to oversimplify things a bit, you can think of European policy as involving a bailout, not of Greece, but of creditor-country banks, with the Greek government simply acting as the middleman — and with the Greek public, which has seen a catastrophic fall in living standards, required to make further sacrifices so that it, too, can contribute funds to that bailout.

One way to think about the demands of the newly elected Greek government is that it wants a reduction in the size of that contribution. ... But doesn’t Greece have an obligation to pay ... debts? That’s where the moralizing comes in.

It’s true that Greece (or more precisely the center-right government that ruled the nation from 2004-9) voluntarily borrowed vast sums. It’s also true, however, that banks in Germany and elsewhere voluntarily lent Greece all that money. We would ordinarily expect both sides of that misjudgment to pay a price. But the private lenders have been largely bailed out... Meanwhile, Greece is expected to keep on paying.

Now,... nobody believes that Greece can fully repay. So why not recognize that reality and reduce the payments to a level that doesn’t impose endless suffering? Is the goal to make Greece an example for other borrowers? If so, how is that consistent with the values of what is supposed to be an association of sovereign, democratic nations? ...

Objectively, resolving this situation shouldn’t be hard. ...Greece has actually made great progress in regaining competitiveness; wages and costs have fallen dramatically, so that, at this point, austerity is the main thing holding the economy back. So what’s needed is simple: Let Greece run smaller but still positive surpluses, which would relieve Greek suffering, and let the new government claim success, defusing the anti-democratic forces waiting in the wings. Meanwhile, the cost to creditor-nation taxpayers — who were never going to get the full value of the debt — would be minimal.

Doing the right thing would, however, require that other Europeans, Germans in particular, abandon self-serving myths and stop substituting moralizing for analysis.

Tuesday, January 27, 2015

Taxing the Wealthy Won't Hurt Economic Growth: I have no idea whether or not Mitt Romney will run for president, and if he does, if he will get the nomination. But many of the issues he ran on when he was a candidate in the last election are likely to reappear this time around no matter whom the candidates turn out to be.

One of the fiercely debated issues in the last presidential election was taxation of the wealthy, and Republican proposals similar to those Romney made when he ran against Obama –– lowering or eliminating the taxes on capital gains, interest, dividends, and inheritances –– will undoubtedly arise again. I expect Republicans will throw a few bones to the middle class in an attempt to get the support of this important constituency, but I also expect the thrust of the proposals to be the same old supply-side policies favoring the wealthy that we have seen in the past.

What I want to focus on, however, is the economic arguments that are made to support the ideological goal of low taxes. ...

Monday, January 26, 2015

"The problem with Syriza’s plans may be that they’re not radical enough":

Ending Greece’s Nightmare, by Paul Krugman, Commentary, NY Times: Alexis Tsipras, leader of the left-wing Syriza coalition, is about to become prime minister of Greece. He will be the first European leader elected on an explicit promise to challenge the austerity policies that have prevailed since 2010. And there will, of course, be many people warning him to abandon that promise, to behave “responsibly.”

So how has that responsibility thing worked out so far?

To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika — the I.M.F., the European Central Bank and the European Commission — extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.

You see, the economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. ... What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. ...

What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver the promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. ...

Yet Greek debt troubles are if anything worse than before the program started. ...

So now that Mr. Tsipras has won, and won big, European officials would be well advised to skip the lectures calling on him to act responsibly...

If anything, the problem with Syriza’s plans may be that they’re not radical enough. Debt relief and an easing of austerity would reduce the economic pain, but it’s doubtful whether they are sufficient to produce a strong recovery. On the other hand, it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that.

Still, in calling for a major change, Mr. Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare.

Sunday, January 25, 2015

Who are the Radicals in Europe?: As I write the Greek people are voting. I was puzzled in the past weeks by the fear (more in the media than in markets, actually) of a “radical” left win. Puzzled, because the radical and ideological policy makers do not seem to live in Greece, today. On January 20 I wrote a piece for the Greek website Macropolis, where I claimed that we should not expect an Armageddon if Syriza wins, but rather some welcome fresh air. I reproduce the piece here: ...

To give you the flavor of his remarks:

... On closer inspection, it seems far more radical the position of those who, despite having grossly underestimated the negative effects of austerity, ask for more of the same; of those who insist on advocating supply-side reforms to cope with a chronic lack of demand; and of those who boast having achieved a balanced budget one year ahead of forecasts, when Europe would benefit from a recovery of domestic demand in Germany.

What will happen then, if “radical” Syriza will win the election? Actually not much. ...

Friday, January 23, 2015

Jamie Galbraith in interviewed by Roger Strassburg on the upcoming Greek election and the prospects and consequences of a possible Syriza government:

Roger Strassburg: Can you tell us a little about what Syriza has for plans if it were to get elected, what the platform is. You are an advisor of Tsipris currently?

James Galbraith: I'll start out by qualifying my role. I consider that I'm a friend of the movement for a change of government in Greece, and specifically a friend of Alexis Tsipras. I've been a colleague for the last couple of years of Yanis Varoufakis, who is now running for parliament in Athens at the moment on the Syriza ticket. He was preselected by Syriza for what is the largest multi-seat constituency. The night before the vote in Parliament, where the third round of the presidential selection precipitated this election, I sent a personal note of encouragement to Alexis Tsipras, which they released to the Greek press. So my position is known in Greece.

What is the platform of the Syriza movement? Let me just summarize it without going into the details of the various measures that they propose to take. I think the fundamental point is that the Greek nation has been subjected to conditions for the continuing provision of financing, including the restructuring of the debt in 2012. These were the Memorandums, which are manifestly unsuccessful as an economic recovery program. That point is now abundantly clear to the Greek electorate, which is why the party that has rejected those conditions is in the leading position. So the basic provision of the Syriza platform is that those conditions will no longer be agreed to as a position of the Greek government.

Roger Strassburg: Which means?

James Galbraith: Let me carry on for a little bit on how best to think of those provisions.

The superficial presentation one reads in the press is: financial assistance, but in order to qualify for it you have to make certain reforms, and the point of the reforms is to put your economy back into a position of being competitive and on the path of growth. And that's been going on for six years, and the results are what we see: Instead of a growing economy you have an economy and a society stressed to the point of breaking, with massive unemployment and the emigration of substantial parts of the professional class especially, and the weakening of the core social institutions, education, health care, urban services and everything else to the point where they are actually a barrier to investment and economic success. And you have the impoverishment of large sections of the population, especially the elderly population. It's at every level a failure. Then one has to ask, was there a bona fide program for economic recovery in the first place? And I think it's clear that even if those who argued for this program believed it might produce recovery and growth, these objectives were very secondary or even tertiary considerations in their minds. It is clear that the policies that were specified as a condition were at bottom not recuperative, but punitive in character. Punitive in character against the whole Greek nation, and on an improper principle of collective responsibility for the admitted mismanagement of the affairs of the Greek state by previous governments and by the Greek political class.

Roger Strassburg: Schäuble has said as much.

James Galbraith: Yes. If you read Timothy Geithner's memoir, it's clear that he was very struck by this attitude, which reflected a moralizing indifference to the future of Europe.

Roger Strassburg: That's the attitude of most of the German government and the press.

James Galbraith: That fact was not concealed by them. I'm obviously not one of most the unqualified admirers of Secretary Geithner, but on this point, clearly he had recorded an accurate perception and an admirable reaction to that way of conceiving things.

Roger Strassburg: He was rebuffed by the Europeans.

James Galbraith: Yes, sure he was. So we have it on the record in an irrefutable way that it was a punitive rather than a recuperative strategy. I don't think anybody can really argue otherwise. A punitive strategy that was in place partly because of the interests of creditors in getting assets at fire-sale prices. That's basically a debt collector's attitude. And partly because of the internal politics of the German state at that time, in which a moralizing narrative was politically more useful than a more generous one would have been.

Roger Strassburg: I don't think that's really changed.

James Galbraith: Perhaps not, but it is one of the considerations that went into the implementation of the policy in the first place.

Roger Strassburg: Of course now they can't change that because they've essentially given the public...

James Galbraith: Let's get to the question of whether things can change a little bit down the road. I think one negotiates with people you disagree with. You don't negotiate with people you agree with. We'll just establish this as the starting point for the conversation. In that case, having recognized this, that we're no longer playing the games that the incumbent government at the moment has been playing, of pretending that the policies that you're signing on to are growth and recovery and reform policies when you know that they are simply the conditions for the financial policy of “extend and pretend” that has been underway for quite a long time.

That said, what is the leverage that would be applied to the Greek government if it chooses to recognize this reality and take a different path? In fact the leverage available is not zero, but it's limited to some measures that would be fairly extreme in ordinary conditions. On the one hand, there are certain parts of the debt that should ordinarily be rolled over. Since the debt is now almost all – all the significant parts of it are in the hands of public authorities, the question of whether they would roll it over is a policy question for them. In some sense they have the ability, if they were to choose, to place the Greeks in technical default, but one has to ask what happens under those circumstances, and the answer is, I would think, not very much. If I owe you a note, and my ability to pay it depends upon your willingness to roll it over, then if you, say, you don't roll it over, and I don't pay you, well, you still hold the note and it's still accruing interest and it's still an asset. It's not an economic issue between us, except that you don't have the cash. But the European Central Bank and other European authorities are not in need of cash. It's not like a private debt. So that's a bit of an artificial question.

And the other point of leverage is the Emergency Liquidity Authority, which backstops the Greek banking system. To cut the ELA would be to pull the plug on the Greek banking system and effectively to force a crisis in the affairs of the Eurozone. If the attitude of the creditors is “my way or the highway”, that you can have an election, but you may not change your policies, well then the burden of historical responsibility will be on them. We shall see. However my basic view is that Germany, having been one of the central countries at the origin of the European Union and at the origin of the Eurozone, will wisely not take the step of blowing up the European Union and the Eurozone over an argument about the conditionalities attached to past financial bargains.

Roger Strassburg: That depends on how they estimate the risk that that will happen. I'm not sure how they're estimating it.

James Galbraith: That is, of course, the question, but when you go into a poker game, you don't go in showing your cards. Obviously the German government would like the potentially incoming Greek government to fold its hand. I think they can reasonably expect that the incoming Greek government, unlike the previous Greek governments, won't do that. A major difference is that previous Greek governments had large internal factions fundamentally aligned with the policies of the Memorandum and the Troika. This was certainly true of the Papandreou government. George Papandreou was surrounded by neoliberal fellow travelers. And that won't be true of the incoming government, assuming Syriza wins the election. So the European partners can reasonably expect that the poker game will have to be played for a while. We'll see if it can come to some kind of a reasonable agreement. You have two sovereign countries with a difference of view, and one of them has a very strong case in equity for taking a different route after six years of good-faith effort to make the other route work when it was manifestly not a workable route.

Roger Strassburg: I know Yanis Varoufakis made it very clear about that when we talked to him a little over a year ago. He said that he would simply not pay as long as the conditions weren't right.

James Galbraith: If you look at the Greek government debt in accrual accounting terms, if you look at it under the terms of IPSAS, the restructuring in 2012 was already very fundamental. This is a debt which exists on very long terms at low interest rates, but the most important thing is that it's in the hands of public creditors. The stuff that's in the hands of private creditors can be paid without difficulty, so there isn't a risk of a generalized private credit market debacle. The stuff in public hands is an accounting matter, which has to do with the rules of the Eurozone that you can't actually write down the debt because that would make it too easy to escape from the conditionalities.

In any event the conditionalities are going to be essentially a dead letter once the new government gets its policies in place. Let's just take one example I'm a little familiar with. If you go out to the Greek islands, they each have their own electric power generation station, which is in the nature of islands. They're all monopolies. Do you allow those monopolies to be sold off to foreign investors in order to satisfy your debts, in which case you're putting the residents of each of these little islands at the mercy of a tiny little electric power monopoly? That's from a public policy standpoint not a very good idea. It has nothing to do with economic growth. It has to with the capacity of what's equivalent to a local landlord to charge an unlimited amount of rent. It's like the city of Chicago selling its parking meters to a private company. It meant that there are no more street fairs in Chicago because you have to pay the company for its lost parking meter revenue. That's not an economic growth strategy.

James Galbraith: Yes, but that has material consequences, which have nothing to do with economic growth, but a good deal to do with the viability of community life.

And we're talking also about questions about regulations governing the labor market. There might be some negotiating room there. For instance, there's a provision in Greek law, dating from the time of Andreas Papandreou, which limited the fraction of your labor force that you can lay off at any given time. That provision is hard to maintain when a large fraction of your businesses are going bankrupt. So there's some negotiating room about labor market rules. As you go through these things, you say, okay, is there any merit to the substance of the provision, and if not, what's a better provision?

Parts of the Syriza program are to relieve some of the pressure on the most vulnerable parts of the Greek population, people who don't have access to electric power, people who need food in schools. In Greece today there are significant portions of the population which are in serious distress. Dealing with that is a part of the program. It would be nice for Greece to have some more fiscal room to implement changes, but there are significant changes even if there is no effective or very little effective new fiscal room. Greece has already reduced its trade deficit, it's actually running a primary surplus.

Roger Strassburg: The trade deficits have been reduced because of reduced imports, right?

James Galbraith: Yes, it's primarily due to reduced imports, the point being that at the current level of activity, there's not an immediate need for new fiscal resources in order to just simply carry on. And so a leverage over a change of policy in that respect is not going to be decisive.

So that's the basic scene-setting. Then you have the question of what is it that the European Union could do if it were truly motivated by good will to help not only a partner state in particular, but perhaps more generally, to move from a policy of debt collection and punishment to a policy of stabilization and expansion. That would also, I think, be on the agenda.

Well then we get into the terrain of the Modest Proposal. The Modest Proposal is a proposal for the whole Eurozone, but it would certainly have some applicability to the Greek case. The nature of the proposal has evolved a bit since publication of the last version of the Modest Proposal, thanks to Sr. Draghi and his moves toward Quantitative Easing. A sensible way forward, in which there's been some interest in other governments of Europe, would be to launch a larger investment program through the European Investment Bank and for the ECB to guarantee the price of EIB bonds. Taking account of the fact that the rhetoric of Europe has moved very much in favor of an investment program, and certainly at the rhetorical level Juncker's 315 billion euro program establishes that this is a legitimate need, an important need. But of course Juncker's proposal is not an effective policy.

Roger Strassburg: Is this another matching funds problem?

James Galbraith: It's a leverage problem. In the case of the Juncker program there's only a small amount of public money, and the idea is that this is going to incentivize a large amount of private investment. It's not really very plausible, but let's take the fact that he's acknowledged the need for a program and also has acknowledged at least a fraction of the scale that's actually required. So we've put some large-looking numbers on the table. These are steps in the right direction. Now we can haggle over what it takes to make it work. It's a bit like George Bernard Shaw and Lady Astor. You know that story, right?

Roger Strassburg: No, I don't.

James Galbraith: It's one of the old stories. Shaw turned to Lady Astor at a dinner party and said, “Madame, would you sleep with me for a million pounds?”, and she said, “I'd consider it”. Then he said, “How about ten pounds?”, and she said, “What do you think I am?” Then he said, “Well we've established that, now we're just haggling over the price.” Having established that we need the investment program, we can now talk about how to achieve it.

The other item that would be extremely useful for the European Union to act on quickly would be to get some measures for income stabilization and humanitarian assistance for vulnerable populations.

Roger Strassburg: Transfer programs.

James Galbraith: I wouldn't call them transfer programs. I'd call them social insurance programs. Transfer implies that somebody rich is paying for somebody poor. But when you're taking a resource which is presently out of use and bringing it back into use, that's not what you're doing. You're actually stabilizing the social and economic situation in the recipient country at no real cost to the larger European economy.

Roger Strassburg: You're reinstating the insurance programs.

James Galbraith: Yes, exactly. And doing it on a sustainable basis. Unemployment insurance has been discussed as a potential Europe-wide initiative, but you could also have nutrition assistance. I've over the years proposed a few other things, but those two would be immediately practical, and the discussion of how to fund them is in the Modest Proposal.

So I think what one can expect, and I'm not speaking for Syriza in any sense by saying this, and I do want that to be clear, but I think one can expect a constructive negotiating position to be developed by a new Greek government. And a constructive and reasonable one, one that is based on principles that have been applied at every level in the construction of Europe.

The European Union and German Unification were both brought into being on principles of social solidarity and common progress; the Federal Republic in the first place, German unification and the European Union, all constructed on a language of principles of inclusion and solidarity and mutual support.

Roger Strassburg: The Unification was all Germans.

James Galbraith: That was all Germans, yes. But it's okay, it's a principle that has been articulated in Germany, that is understood in the German political community, and that is, I think, the principle on which progress for Europe, or for that matter, the stability of Europe depends.

Roger Strassburg: That would require a lot of convincing. The Reunification was one thing...

James Galbraith: We're not asking for a referendum, a plebiscite in the German population. This is a question to be decided between governments. We don't need to convince people on the principles of this, one simply needs to have an agreement about an acceptable way to proceed.

Roger Strassburg: It's really not that simple in Germany – or anyplace else, for that matter.

James Galbraith: Nobody claims simplicity. Speaking now, as I have been all along, for myself here, I've always as a general rule felt that one negotiates with people you disagree with, not with people you agree with, and you negotiate in good faith. It's an obligation on both sides that you negotiate in good faith, otherwise there's no point in having the negotiation. And I would always choose as a negotiation partner a political authority that has real authority. Certainly the leader of Germany is a person in that position, I would say the most successful and dominant political personality in modern Europe. When you're negotiating, you negotiate with the top person. That makes you more likely to have a favorable result than if you negotiate with someone who is in a very weak internal position, and not able to make changes in policy.

Roger Strassburg: One of those things that's been kicked around for a while, is there going to be such a thing as a United States of Europe, and that's not going to happen.

James Galbraith: It's certainly not part of the Syriza program. The Syriza program is a pro-European program. It is, and I think Europe and Europeans, people are committed to the European project, can consider it a great stroke of luck that there has arisen in Greece, and consequently, partly consequently and subsequently, in Spain, as well as in the present government of Italy, a pro-European set of parties, whose objective is change, constructive change, to make the European project viable. That's in many ways the last line that will be there. If those movements are not successful, then you have the Five Star movement in Italy, and you have, I suppose, the Golden Dawn in Greece. So good luck to you if you go from where we are now to that. And I'm not saying that the Five Star and the Golden Dawn are equivalent, they're not, but they're anti-European.

Roger Strassburg: A little like AfD in Germany.

James Galbraith: I wouldn't even say that. I think that all three are really quite different, but you're going to move toward politics which is much nastier, much more vicious and anti-European in character rather than constructive and pro-European in character.

Roger Strassburg: You have those trends in the UK, as well.

James Galbraith: Of course. So with that in mind, you have here a chance, at least in principle, to create a window of, let's say, constructive hope in the European case.

Roger Strassburg: Do you think Syriza has a chance of winning? I'm asking for your prophetic powers here...

James Galbraith: It's not necessary to hope in order to persevere. It's the motto of William of Orange, I learned some years ago from my friend Bill Black. I maintain that, let's pursue a line as long as there is some prospect of success.

Roger Strassburg: This is the best chance that they've had in, well, ever.

James Galbraith: Yes. As a small “d” democrat I find the situation in Greece quite inspiring because you have here something really very rare in any country in recent years, which is an election in which the public is making a choice that matters. The outcome is not a question of some manipulation among existing political classes, or even the evolution of a previously existing party system, which was the case in Italy. They have a clear-cut choice, and they're making it. This is what democracy should be about. Often it is some very blurry version of that at best.

Roger Strassburg: It appears at the moment that Syriza won't be able to govern without a coalition.

James Galbraith: Yes, I'd agree with that. If you just look at the math of the polls, my guess is that they'd need somewhere up to twenty seats.

Roger Strassburg: Given the bonus of fifty.

James Galbraith: Yes. They'd get a base of eighty, then a bonus of fifty, and then they need up to twenty more, depending on what the actual margin of victory is. And then what actually happens depends on what happens to the representation of the smaller entities in the Greek system, given the three percent threshold to get into the parliament, so you don't know which of the various other players will be represented and at what numbers. That's all in flux, so we'll see.

Roger Strassburg: It remains interesting.

James Galbraith: Oh, it will remain interesting, but you need to have, say, the acquiescence of twenty members, and if you don't get them, then there's another election. And the typical pattern of a second election is to reaffirm the first, and the electorate can either go forward or backwards. It's generally likely in the second case that you'd get a coalescence of people who say, enough of this nonsense, and move into the Syriza camp.

Roger Strassburg: People will vote for the one more likely to win.

James Galbraith: Yes, exactly. Also, when you have an election, and you have this outcome of where the party which was just a few years ago at very low levels has moved up into the high twenties, and in terms of popular support is the largest single political entity in the country, then the perception of the party and its leader changes. It was just a few years ago, nobody would talk to Alexis Tsipras. He was considered kind of a dangerous figure who should be kept isolated. Then he became the leader of the Greek official opposition, which made him at least a presence on the local scene. And then with the European parliamentary elections he became the largest party, which created a kind of presumptive possibility that he would, that Syriza would win the election. And then there was the question of whether there would be an election, and then it became clear that the government could not muster 180 votes to elect a presidential candidate, and there we are. This is a cumulative, ongoing process.

Roger Strassburg: They now appear to be viable.

James Galbraith: They are, as a political force in Greece, viable.

Roger Strassburg: How is the press treating him. Are they treating him fairly?

James Galbraith: These are tests. I don't begrudge the forces of the status quo their stratagems. I think that there are such things as pariahs in politics. It's not unreasonable to draw distinctions between the mainstream and the fringe, and make it difficult to cross that barrier to become a mainstream political force. Which means, when you have a movement that achieves that, that is something to be taken seriously. It's not a freak phenomenon, it's not something which is achieved easily. It's a process of years. And that's what we've observed in Greece, something which was at one point a minor player of dissidence in a country dominated by New Democracy and PASOK, two very long-established political parties with high dynastic traditions going back to the end of the civil war, and especially to the end of the junta in 1974. And that political order has crumbled, first PASOK, and now you see the relative decline of New Democracy. So something new has emerged.

Roger Strassburg: Isn't PASOK now so low that they may not even make it into the parliament?

James Galbraith: What has happened in PASOK is that George Papandreou has left to form his own formation, and we shall now see what happens there. I'm not actually close enough to be able to judge, but it might be one or the other, Venizelos vs. Papandreou. Or the other two possibilities are that it might be both or it might be neither. We'll see.

Roger Strassburg: Tsipras appears to be somewhat charismatic.

James Galbraith: I've seen him up close on a couple of occasions at important moments where the eyes of the country were clearly on him. I've spoken to him on a number of occasions, he was in Austin at a conference a few years ago, and I have a sense of him as a thoughtful presence in private, and a rather impressive one in public.

Europe’s self-indulgent "archons of austerity" and "doyens of deflation":

Much Too Responsible, by Paul Krugman, Commentary, NY Times: The United States and Europe have a lot in common. Both are multicultural and democratic; both are immensely wealthy; both possess currencies with global reach. Both, unfortunately, experienced giant housing and credit bubbles between 2000 and 2007, and suffered painful slumps when the bubbles burst.

Since then, however, policy on the two sides of the Atlantic has diverged. In one great economy, officials have shown a stern commitment to fiscal and monetary virtue, making strenuous efforts to balance budgets while remaining vigilant against inflation. In the other, not so much.

And the difference in attitudes is the main reason the two economies are now on such different paths. ... No, it’s not morning in America... Recovery could and should have come much faster, and family incomes remain well below their pre-crisis level. Although you’d never know it from the public discussion, there’s overwhelming agreement among economists that the Obama stimulus of 2009-10 helped limit the damage..., but it was too small and faded away far too fast. ...

Europe, on the other hand ... did almost everything wrong. On the fiscal side, Europe never did much stimulus, and quickly turned to austerity ... despite high unemployment. On the monetary side, officials fought the imaginary menace of inflation, and took years to acknowledge that the real threat is deflation. ...

Monetary policy got much better after Mario Draghi became president of the European Central Bank in late 2011. ... But it’s not at all clear that he has the tools to fight off the broader deflationary forces set in motion by years of wrongheaded policy. ...

The terrible thing is that Europe’s economy was wrecked in the name of responsibility. ... In a depressed economy..., a balanced-budget fetish and a hard-money obsession are deeply irresponsible. Not only do they hurt the economy in the short run, they can — and in Europe, have — inflict long-run harm, damaging the economy’s potential and driving it into a deflationary trap that’s very hard to escape.

Nor was this an innocent mistake. The thing that strikes me about Europe’s archons of austerity, its doyens of deflation, is their self-indulgence. They felt comfortable, emotionally and politically, demanding sacrifice (from other people) at a time when the world needed more spending. They were all too eager to ignore the evidence that they were wrong.

And Europe will be paying the price for their self-indulgence for years, perhaps decades, to come.

Count how many times Obama uses the words "I," "me," and "my." Compare that number to how often he says, "You," "we," "our." If the first number is greater than the second, Obama has failed.

This leads naturally to a different question: "Is Ron Fournier More Interested in Analysis or in Bullshit?"...

If Ron Fournier had spent a minute or two looking into the facts of the matter, he might have discovered... ALL presidents since WWII have used substantially more first-person-plural pronouns than first-person-singular pronouns in the SOTU messages; Adding second-person pronouns makes the disproportion even larger; Obama is pretty much in the middle of the pack on all the relevant measures. ...

Mr. Fournier is reprising a sub-theme of the Great Obama Pronoun Fantasy, variants of which seem to draw pundits like flies to rotting meat. ...

The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy: President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. ...Bush’s radical cuts to capital taxes are part of his legacy... And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.

In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent... So did the tax cut make a difference?

Here’s what he finds: ... There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers. ...

President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, that the radical slashing conservatives have brought to them are also partly responsible for our current malaise.

Of course not. Evidence doesn’t matter for the “debate” over climate policy... And this situation is by no means unique. Indeed,... it’s hard to think of a major policy dispute where facts actually do matter; it’s unshakable dogma, across the board. And the real question is why.

Before I get into that, let me remind you of some other news that won’t matter.

First, consider the Kansas experiment. Back in 2012 Sam Brownback, the state’s right-wing governor, went all in on supply-side economics: He drastically cut taxes, assuring everyone that the resulting boom would make up for the initial loss in revenues. Unfortunately..., his experiment has been a resounding failure. ... So will we see conservatives scaling back their claims about the magical efficacy of tax cuts...? Of course not. ...

Meanwhile, the news on health reform keeps ... being more favorable than even the supporters expected. ...

All this is utterly at odds with dire predictions that reform would lead to declining coverage and soaring costs. So will we see any of the people claiming that Obamacare is doomed ... revising their position? You know the answer.

The question, as I said at the beginning, is why. Why the dogmatism? Why the rage...,why this hatred of government in the public interest? Well, the political scientist Corey Robin argues that most self-proclaimed conservatives are actually reactionaries. That is, they’re defenders of traditional hierarchy — the kind of hierarchy that is threatened by any expansion of government, even (or perhaps especially) when that expansion makes the lives of ordinary citizens better and more secure. I’m partial to that story, partly because it helps explain why climate science and health economics inspire so much rage.

Whether this is the right explanation or not, the fact is that we’re living in a political era in which facts don’t matter. This doesn’t mean that those of us who care about evidence should stop seeking it out. But we should be realistic in our expectations, and not expect even the most decisive evidence to make much difference.

Under attack in the House on Wednesday was part of the so-called Volcker rule, a provision of the reforms that limits bank risk taking.

Lawmakers voted 271-154 to delay from 2017 to 2019 a ban on banks holding securitised debt that has been packaged into collateralised loan obligations, with 29 Democrats supporting the postponement along with Republicans. ...

Because the Masters of the Universe need years and years to adjust to this change (Dodd-Frank was passed nearly *five* years ago). Or maybe they are simply hoping to delay and delay until they can get repeal? The president has said he will veto this if it also gets through the Senate, but they will likely try to attach it to other legislation to make a veto much harder.

I don't think the repeal of Glass-Steagall caused the financial crisis. But that doesn't mean the Volcker rule has no value, only costs. Repeal of Glass-Steagall sets up a vulnerability that could cause a crisis in the future, so it's worth fixing via the Volcker rule.

...Norman Ture indeed was the original supply-sider who basically told Chairman Mills to ignore the CEA’s recommendations for fiscal restraint in 1966. We now know the unfortunate history of politics not heeding the advice of sensible economists. And yes – the supply-siders once again pushed for fiscal stimulus in 1981. How did that work out? I bring this up today in light of the fact that Mitt Romney is once again running for President. The last time he did so, he advocated large tax cuts without any serious consideration of how to pay for them. I’m sure Romney will have plenty of supply-side enablers once again.

Tuesday, January 13, 2015

Selective Voodoo: House Republicans have passed a measure demanding that the Congressional Budget Office use “dynamic scoring” in its revenue projections — taking into account the supposed positive growth effects of tax cuts. It remains to be seen how much damage this rule will actually cause. The reality is that there is no evidence for the large effects that are central to right-wing ideology, so the question is whether CBO will be forced to accept supply-side fantasies.

Meanwhile, one thing is fairly certain: CBO won’t be applying dynamic scoring to the positive effects of government spending, even though there’s a lot of evidence for such effects.

A good piece in yesterday’s Upshot reports on a recent study of the effects of Medicaid for children; it shows that children who received the aid were not just healthier but more productive as adults, and as a result paid more taxes. So Medicaid for kids may largely if not completely pay for itself. It’s a good guess that the Affordable Care Act, by expanding Medicaid and in general by ensuring that more families have adequate health care, will similarly generate significant extra growth and revenue in the long run. Do you think the GOP will be interested in revising down estimates of the cost of Obamacare to reflect these effects? ...

Monday, January 12, 2015

What's the real reason Republicans are pushing for the Keystone XL pipeline?:

For the Love of Carbon, Commentary, NY Times: It should come as no surprise that the very first move of the new Republican Senate is an attempt to push President Obama into approving the Keystone XL pipeline... After all,... the oil and gas industry — which gave 87 percent of its 2014 campaign contributions to the G.O.P. — expects to be rewarded for its support.

But why is this environmentally troubling project an urgent priority in a time of plunging world oil prices? Well, the party line, from people like Mitch McConnell, the new Senate majority leader, is that it’s all about jobs. ...

Let’s back up for a minute and discuss economic principles. For more than seven years ... the United States economy has suffered from inadequate demand. ... In such an environment, anything that increases spending creates jobs. ...

From the beginning, however, Republican leaders have held ... that we should slash public spending... And they’ve gotten their way... The evidence overwhelmingly indicates that this kind of fiscal austerity in a depressed economy is destructive...

Needless to say, the guilty parties here will never admit that they were wrong. But if you look at their behavior closely, you see clear signs that they don’t really believe in their own doctrine.

Consider, for example, the case of military spending. When it comes to possible cuts in defense contracts, politicians ... suddenly begin talking about all the jobs that will be destroyed. ... This is the phenomenon former Representative Barney Frank dubbed “weaponized Keynesianism.”

And the argument being made for Keystone XL is very similar; call it “carbonized Keynesianism.” ... But government spending on roads, bridges and schools would do the same thing. ... If Mr. McConnell and company really believe that we need more spending to create jobs, why not support a push to upgrade America’s crumbling infrastructure?

So what should be done about Keystone XL? If you believe that it would be environmentally damaging — which I do — then you should be against it, and you should ignore the claims about job creation. The numbers being thrown around are tiny compared with the country’s overall work force. And in any case, the jobs argument for the pipeline is basically a sick joke coming from people who have done all they can to destroy American jobs — and are now employing the very arguments they used to ridicule government job programs to justify a big giveaway to their friends in the fossil fuel industry.

Saturday, January 10, 2015

This is silly (it's from a discussion of the costs of policy uncertainty from the Becker Friedman Institute):

If the Affordable Care Act has taught us anything, it’s this: A party in power can push through a major policy initiative in the teeth of strong political opposition, but it probably shouldn’t. A better strategy is to secure some support across the political aisle, even at the cost of compromise. Persistent attacks on the Affordable Care Act continue to generate uncertainty about its political durability and raise doubts about what the healthcare delivery landscape will look like in the U.S. for many years to come.

That simply wasn't a choice. Securing support across the political aisle was not an option. No amount of compromise would have mattered. Would the millions who now have health insurance, those who now have the option to change jobs without losing insurance, people with pre-existing conditions, etc., etc. be better off if the law had not passed? Because that was the choice Democrats faced, a highly imperfect bill that would do quite a bit of good even with its imperfections, or no bill at all. Bipartisan support for policy is surely a worthy goal, and sometimes a bit of compromise can bring it about. But other times there is no choice except to ram through legislation that one side believes has the potential to do considerable good.

Interesting that the authors didn't pick tax cuts for the wealthy as their example of policy uncertainty. The future prospects for this policy were just as uncertain under Obama, the policy had a high degree of opposition from the other side of the political aisle, and the tax cuts did far less good than the ACA beyond reducing the tax payments for a group of wealthy individuals who didn't need the help. And unlike the ACA and its documented success (if you look past Fox News), the promised trickle down and economic growth miracle never materialized. If we are looking for a case where the harm from policy uncertainty exceeds the benefits of the policy, this is a much better candidate than the ACA.

I do like some of their other recommendations though, e.g. to use automatic stabilizers:

Automatic stabilizers—unemployment insurance spending that goes up when employment falls, for example—offer some advantages over discretionary measures. The fiscal equivalent of an “advance directive,” they kick-in quickly in real time as economic fundamentals change. They don’t need to wait for a legislative act. And while every distribution of federal dollars involves some political infighting, a policy response developed in advance of actual need is more likely to be evaluated primarily on its economic rather than political merits. Finally, those bearing the brunt of the shock—wage earners and businesses—aren’t left wondering when or if some help is on the way.

And:

Take some of the politicking out of policymaking. A Congress that indiscriminately exercises its right to debate, amend, and delay can produce excessive tug-of-war policymaking that comes with the cost of heightened uncertainty. Asking Congress to skip the dickering and bind itself to a simple up or down vote, as it already does with military base closures and fast-track trade authority, could minimize the drama—and cost—of indecision.

Though taking the politicking out of policymaking is probably wishful thinking, and it's hard to imagine Republicans going along with any expansion of automatic stabilizers (their proposals are likely to run in the other direction, reducing support for programs such as food stamps).

So long as we have political parties with differing ideological views, there will always be policy uncertainty. One side will always want to undo what the other puts into place. They will rarely agree, and a call for bipartisan support before anything can be done is a call to do nothing. I don't think that's the best approach.

But so long as we are engaged in wishful thinking, let me add to the list. What I'd add is more honesty in evaluating programs after they are put into place. More attention and responsiveness to the empirical evidence. If tax cuts don't trickle down or create growth, if austerity actually makes things worse, if fiscal policy multipliers are non-zero in deep recessions when we are stuck at the zero bound, if the ACA is working to provide health services to millions of people who dearly needed such help, etc., etc., then accept the evidence and adjust policy accordingly. I suppose it's too much to expect politicians to do this, but can we at least get economists to treat these issues honestly (and maybe the media would do better as a consequence)? I'd settle for that.

Friday, January 09, 2015

Voodoo Time Machine, by Paul Krugman, Commentary, NY Times: Many of us in the econ biz were wondering how the new leaders of Congress would respond to the sharp increase in American economic growth that ... began last spring. After years of insisting that President Obama is responsible for a weak economy, they couldn’t say the truth — that short-run economic performance has very little to do with who holds the White House. So what would they say?

Well, I didn’t see that one coming: They’re claiming credit. Never mind the fact that all of the good data refer to a period before the midterm elections. Mitch McConnell, the new Senate majority leader, says ... that growth reflected “the expectation of a new Republican Congress.”

The response of the Democratic National Committee — “Hahahahahahaha” — seems appropriate. I mean, talk about voodoo economics: Mr. McConnell is claiming not just that he can create prosperity without, you know, actually passing any legislation, but that he can reach back in time and create prosperity before even taking power. ...Mr. McConnell’s self-aggrandizement is ... scary ... because it’s a symptom of his party’s epistemic closure. Republicans know many things that aren’t so, and no amount of contrary evidence will get them to change their minds. ... Congress is now controlled by men who never acknowledge error, let alone learn from their mistakes.

In some cases, they may not even know that they were wrong. After all, conservative news media are not exactly known for their balanced coverage; if your picture of ... health reform is ... based on Fox News, you probably have a sense that it has been a vast disaster, even though the reality is one of success...

The main point, however, is that we’re looking at a political subculture in which ideological tenets are simply not to be questioned... Supply-side economics is valid no matter what actually happens to the economy, guaranteed health insurance must be a failure even if it’s working, and anyone who points out the troubling facts is ipso facto an enemy.

And we’re not talking about marginal figures. You sometimes hear claims that the old-fashioned Republican establishment is making a comeback, that Tea Party extremists are on the run and we can get back to bipartisan cooperation. But that is a fantasy. We can’t have meaningful cooperation when we can’t agree on reality, when even establishment figures in the Republican Party essentially believe that facts have a liberal bias.

Wednesday, January 07, 2015

It didn't take Republicans long to begin their assault on Social Security:

Getting It Wrong on Disability Insurance, by Kathy Ruffing, CBPP: I’ve explained that a new House rule will make it harder to reapportion payroll taxes between Social Security’s retirement and Disability Insurance (DI) trust funds to avert a one-fifth cut in benefits to severely impaired DI recipients in late 2016. In a revealing statement, co-sponsor Representative Tom Reed (R-NY) says the change is designed to prevent Congress from “raiding Social Security to bail out a failing federal program.” He’s doubly wrong.

First, far from “failing,” DI has grown mostly in response to well-understood demographic and program factors like the aging of the baby boom, and the program’s trustees have long anticipated the need to replenish the trust fund next year... Second, DI isn’t distinct from Social Security; it’s an essential part of Social Security.

Social Security is much more than a retirement program. It pays modest but guaranteed benefits when someone with a steady work history dies, retires, or becomes severely disabled. ...

Statements like Representative Reed’s implicitly attempt to pit Social Security retirement and disability beneficiaries against each other. ...

After harming the recovery from the Great Recession -- and making it harder for the unemployed to find jobs -- through austerity, blocking jobs bills, and standing in the way of additional stimulus measures, Republicans are trying to take credit for the recovery. They made things worse, and when they stopped doing harmful things, the economy improved and they want credit for that:

The new Senate majority leader, Mitch McConnell, suggested earlier today that the Republican Party deserves credit for recent data showing that the economic recovery has picked up speed. ... Mr. McConnell is claiming credit for a recovery based solely on the fact that Republicans have just taken control of both houses of Congress...

Here’s what Mr. McConnell said on the floor this morning:

“After so many years of sluggish growth, we’re finally starting to see some economic data that can provide a glimmer of hope. The uptick appears to coincide with the biggest political change of the Obama Administration’s long tenure in Washington: the expectation of a new Republican Congress.”

That deserves ridicule. Republicans were terribly wrong about Federal Reserve policy, just as wrong about austerity and the confidence fairy, yet here they are once again telling us that the confidence fairy rather than the end of their awful policy is responsible for the recovery.

Monday, January 05, 2015

Me, at MoneyWatch, on the Republican's effort to institute dynamic scoring:

Do tax cuts partly pay for themselves?: Now that Republicans have taken control of the House and Senate, they are pushing to change how the Congressional Budget Office (CBO) and the Joint Tax Committee (JTC) evaluate tax legislation.

The effort is being made on two fronts. The first is an attempt by many Republicans to replace the director of the CBO, Doug Elmendorf, with someone more sympathetic to a new approach to evaluating the budgetary impact of proposed legislation. The second is a push from Rep. Paul Ryan, R-Wisconsin, who will take over as chair of the to the Ways and Mean Committee in January, to implement a new rule that would require the CBO and JCT to implement the alternative approach.

The improving economy is surely one factor in President Obama’s rising approval rating. ... How much influence does ... the White House have on the economy,,,? The standard answer among economists ... is: not much. But is this time different?

To understand why economists usually downplay the economic role of presidents,... normally the Fed, not the White House, rules the economy. Should we apply the same rule to the Obama years?

Not quite.

For one thing, the Fed has had a hard time gaining traction ... because the aftermath of a huge housing and mortgage bubble has left private spending relatively unresponsive to interest rates. This time around, monetary policy really needed help from a temporary increase in government spending, which meant that the president could have made a big difference. And he did, for a while; politically, the Obama stimulus may have been a failure, but an overwhelming majority of economists believe that it helped mitigate the slump.

Since then, however, scorched-earth Republican opposition has more than reversed that initial effort. In fact, federal spending adjusted for inflation and population growth is lower now than it was when Mr. Obama took office...

There is, however, another sense in which Mr. Obama has arguably made a big difference. The Fed has had a hard time getting traction, but it has at least made an effort to boost the economy — and it has done so despite ferocious attacks from conservatives... Without Mr. Obama to shield its independence, the Fed might well have been bullied into raising interest rates, which would have been disastrous. So the president has indirectly aided the economy by helping to fend off the hard-money mob.

Last but not least,... the fact is his opponents have spent years claiming that his bad attitude — he has been known to suggest ... that some bankers have behaved badly — is somehow responsible for the economy’s weakness. Now that he’s presiding over unexpected economic strength, they can’t just turn around and assert his irrelevance.

So is the president responsible for the accelerating recovery? No. Can we nonetheless say that we’re doing better than we would be if the other party held the White House? Yes. Do those who were blaming Mr. Obama for all our economic ills now look like knaves and fools? Yes, they do. And that’s because they are.

Friday, December 26, 2014

Underinvesting in the public good, Understanding Society: There are quite a few investments in social programs that would have spectacular return on investment, but that in fact remain unfunded or underfunded. I am thinking here of things like broadened preschool programs, enhanced dropout prevention programs, regional economic development efforts, and prison re-entry programs. Why are these spectacular opportunities so dramatically under-exploited in the United States and other nations?

One line of answer derives from a public choice perspective: the gains that follow from the investment represent public goods, and public goods are typically under-provided. But that doesn't really answer the question, because it is governments that are underinvesting, not uncoordinated groups of independent agents. And governments are supposed to make investments to promote the public good.

Another plausible answer is that the citizens who are primarily served by most of the examples provided above are poor and disenfranchised; so the fact that they would benefit from the program doesn’t motivate the politically powerful to adopt the policy.

There is also a powerful influence of political ideology at work here. Conservative ideas about what a good society looks like, how social change occurs, and the role of government all militate against substantial public investment in programs and activities like those mentioned above. These conservative political beliefs are undergirded by a white-hot activism against taxes that makes it all but impossible to gain support in legislative bodies for programs like these -- no matter what the return on investment is.

Failure to achieve these kinds of social gains through public investment might seem like a very basic element of injustice within our society. But it also looks like strong evidence of system failure: the political and economic system fail to bring about as much public good as is possible in the circumstances. The polity is stuck somewhere on the low shoulders of the climb towards maximum public benefit for minimum overall investment. It is analogous to the situation in private economic space where there are substantial obstacles to the flow of investment, leaving substantial possible sources of gain untapped. It is s situation of massive collective inefficiency, quite the contrary of Adam Smith's view of the happy outcomes of the hidden hand and the market mechanism.

This last point brings us back to the public goods aspect of the problem. A legislature that designs a policy or program aimed at capturing the gains mentioned here may succeed in its goal and yet find that the gains accrue to someone else -- the public at large or another political party. The gains are separated from the investment, leaving the investment entity with no rational incentive to make the investment after all.

Some policy leaders have recognized this systemic problem and have turned to an innovative possible solution, social impact bonds (link). Here is how the Center for American Progress explains this idea.

A social impact bond, or SIB, is an innovative financial tool that enables government agencies to pay for programs that deliver results. In a SIB agreement, the government sets a specific, measurable outcome that it wants achieved in a population and promises to pay an external organization—sometimes called an intermediary—if and only if the organization accomplishes the outcome. SIBs are one example of what the Obama administration calls “Pay for Success” financing. (link)

Essentially the idea is to try to find a way of privatizing the public gains in question, so that private investors have an incentive to bring them about.

This is an interesting idea, but it doesn't really solve the fundamental problem: society's inability to make rational investment in its own wellbeing. It seems more like a way of shifting risks of program success or failure from the state agency to the private entity. Here is a McKinsey discussion of the concept (link), and here is a more skeptical piece in the Economist (link).

Yet if you look back at what actually happened over the past year,... a number of major government policies worked just fine — and the biggest successes involved the most derided policies. You’ll never hear this on Fox News, but 2014 was a year in which the federal government, in particular, showed that it can do some important things very well...

Start with Ebola... Judging from news media coverage..., America was on the verge of turning into a real-life version of “The Walking Dead.” And many politicians dismissed the efforts of public health officials... As it turned out, however, the Centers for Disease Control and Prevention ... knew what they were doing..., there was no outbreak here.

Consider next the state of the economy. There’s no question that recovery from the 2008 crisis has been painfully slow and should have been much faster. In particular, the economy has been held back by unprecedented cuts in public spending and employment.

But the story you hear all the time portrays economic policy as an unmitigated disaster... So it comes as something of a shock when you look at the actual record and discover that growth and job creation have been substantially faster during the Obama recovery than they were during the Bush recovery last decade (even ignoring the crisis at the end)...

What’s more, recent data suggest that the economy is gathering strength... Maybe economic management hasn’t been that bad, after all.

Finally, there’s the hidden-in-plain-sight triumph of Obamacare, which is just finishing up its first year of full implementation. ... In fact, Year 1 surpassed expectations on every front. ... And all indications suggest that year two will be marked by further success.

And there’s more. For example, at the end of 2014, the Obama administration’s foreign policy, which tries to contain threats like Vladimir Putin’s Russia or the Islamic State rather than rushing into military confrontation, is looking pretty good.

The common theme here is that, over the past year, a U.S. government subjected to constant bad-mouthing, constantly accused of being ineffectual or worse, has, in fact, managed to accomplish a lot. On multiple fronts, government wasn’t the problem; it was the solution. Nobody knows it, but 2014 was the year of “Yes, we can.”

Wednesday, December 17, 2014

Surprise! Or not (more concerned with this than whether the Fed changed a few words in its Press Release following the FOMC meeting):

Wall Street Salivating Over Further Destruction of Financial Reform, by Kevin Drum: Conventional pundit wisdom suggests that Wall Street may have overreached last week. Yes, they won their battle to repeal the swaps pushout requirement in Dodd-Frank, but in so doing they unleashed Elizabeth Warren and brought far more attention to their shenanigans than they bargained for. They may have won a battle, but ... they're unlikely to keep future efforts to weaken financial reform behind the scenes, where they might have a chance to pass with nobody the wiser.

Then again, maybe not. Maybe it was all just political theater and Wall Street lobbyists know better than to take it seriously. Ed Kilgore points to this article in The Hill today:

Banks and financial institutions are planning an aggressive push to dismantle parts of the Wall Street reform law when Republicans take control of Congress in January. ...

Will Democrats in the Senate manage to stick together and filibuster these efforts to weaken Dodd-Frank? ... I'd like to think that Elizabeth Warren has made unity more likely, but then again, I have an uneasy feeling that Wall Street lobbyists might have a better read on things than she does. Dodd-Frank has already been weakened substantially in the rulemaking process, and this could easily represent a further death by a thousand cuts. ...

Tuesday, December 16, 2014

How Fiscal Policy Failed During the Great Recession: Fiscal policy failed us during the Great Recession. We did get a fiscal stimulus package shortly after Obama took office, and it helped. But it wasn’t big enough and did not last long enough to make the kind of difference that was needed. Fear of deficits stood in the way, though all the dire predictions that were made about the debt associated with the stimulus package did not come to pass. We could have done so much more. ...

Monday, December 15, 2014

Wall Street’s Revenge, by Paul Krugman, Commentary, NY Times: On Wall Street, 2010 was the year of “Obama rage,” in which financial tycoons went ballistic over the president’s suggestion that some bankers helped cause the financial crisis. They were also, of course, angry about the Dodd-Frank financial reform, which placed some limits on their wheeling and dealing.

The Masters of the Universe, it turns out, are a bunch of whiners. But they’re whiners with war chests, and now they’ve bought themselves a Congress. ...

Wall Street overwhelmingly backed Mitt Romney in 2012, and invested heavily in Republicans once again this year. And the first payoff to that investment has already been realized. Last week Congress passed a ... rollback of one provision of the 2010 financial reform.

In itself, this rollback is significant but not a fatal blow to reform. But it’s utterly indefensible. ... One of the goals of financial reform was to stop banks from taking big risks with depositors’ money. ... If banks are free to gamble, they can play a game of heads we win, tails the taxpayers lose. ...

Dodd-Frank tried to limit this kind of moral hazard in various ways, including a rule barring insured institutions from dealing in exotic securities, the kind that played such a big role in the financial crisis. And that’s the rule that has just been rolled back. ...

What just went down isn’t about free-market economics; it’s pure crony capitalism. And sure enough, Citigroup literally wrote the deregulation language that was inserted into the funding bill.

Again, in itself last week’s action wasn’t decisive. But it was clearly the first skirmish in a war to roll back much if not all of the financial reform. And if you want to know who stands where in this coming war, follow the money: Wall Street is giving mainly to Republicans for a reason. ...

Meanwhile, it’s hard to find Republicans expressing major reservations about undoing reform. You sometimes hear claims that the Tea Party is as opposed to bailing out bankers as it is to aiding the poor, but there’s no sign that this alleged hostility to Wall Street is having any influence at all on Republican priorities.

So the people who brought the economy to its knees are seeking the chance to do it all over again. And they have powerful allies, who are doing all they can to make Wall Street’s dream come true.

Section 716 of Dodd-Frank says that institutions that receive federal insurance through FDIC and the Federal Reserve can’t be dealers in the specialized derivatives market. Banks must instead “push out” these dealers into separate subsidiaries that don’t benefit from the government backstop. They can still trade in many standardized derivatives and hedge their own risks, however. This was done because having banks act as swap dealers put taxpayers at risk in the event of a sudden collapse. That’s it.

Why would you want a regulation like this? The first is that it acts as a complement to the Volcker Rule. ...

A second reason is 716 will also prevent exotic derivatives from being subsidized by the government’s safety net. ...

The third reason is for the sake of financial stability. ...

Stiglitz reiterated this point today, saying “Section 716 facilitates the ability of markets to provide the kind of discipline without which a market economy cannot effectively function. I was concerned in 2010 that Congress would weaken 716, but what is proposed now is worse than anything contemplated back then.”

Now many on Wall Street would argue that this rule is unnecessary. However, their arguments are not persuasive. ...

We should be strengthening, not weakening, financial reform. And removing this piece of the law will not benefit this project.

Sunday, December 07, 2014

The imaginary world of small state people: ...In ... Europe ... there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.

I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.

My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. ... My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale. ...

Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. ...

The ... claim that Osborne’s cuts have been such a success that they will cause a “deeper intellectual wound to the left than we currently understand” is simply delusional. These are fantasy ideas from those living in an imaginary world, while in reality the policies they support do serious harm.

Friday, December 05, 2014

Despite the political difficulties it has caused, Obamacare was not a mistake:

Democrats Against Reform, by Paul Krugman, Commentary, NY Times: It’s easy to understand why Republicans wish health reform had never happened.... But it’s more puzzling — and disturbing — when Democrats like Charles Schumer, senator from New York, declare that the Obama administration’s signature achievement was a mistake.

In a minute I’ll take on Mr. Schumer’s recent remarks. But first, an update on Obamacare..., which continues to rack up remarkable (and largely unreported) successes ... with more than 10 million people gaining coverage since last year. ... And ... a huge majority of the newly insured are pleased with their coverage...

What about costs? There were many predictions of soaring premiums. But... Premiums for 2014 came in well below expectations...

In short,... as a policy intended to improve American lives, it’s going really well. Yet it has not ... been a political winner for Democrats. Which brings us to Mr. Schumer.

The Schumer critique — he certainly isn’t the first to say these things... — calls health reform a mistake because it only benefits a minority of Americans, and that’s not enough to win elections. What President Obama should have done ... was focus on improving the economy as a whole.

This is deeply wrongheaded in at least three ways.

First, while it’s true that most Americans have insurance through Medicare, Medicaid, and employment-based coverage..., but what happens if you’re fired, or your employer goes bust, or it cancels its insurance program? What if you want to change jobs for whatever reason, but can’t find a new job that comes with insurance? ...

Second, whenever someone says that Mr. Obama should have focused on the economy, my question is, what do you mean by that? Should he have tried for a bigger stimulus? I’d say yes, but ... especially after 2010 scorched-earth Republican opposition killed just about every economic policy he proposed. Do you think this would have been different without health reform? Seriously? ...

Finally, we need to ask, what is the purpose of winning elections? The answer, I hope, is to do good — not simply to set yourself up to win the next election. ....

And one related observation: If more Democrats had been willing to defend the best thing they’ve done in decades, rather than run away from their own achievement and implicitly concede that the smears against health reform were right, the politics of the issue might look very different today.

Wednesday, December 03, 2014

Return of Focus Hocus Pocus: I’ve been getting correspondence from people saying that I need to respond to Tom Edsall channeling Chuck Schumer on how health reform was a mistake, Obama should have focused on the economy.

The thing is, I responded to this argument four years ago, and everything I said then still applies. When people say that Obama should have “focused” on the economy, what, specifically, are they saying he should have done? Enacted a bigger stimulus? Maybe he could have done that at the very beginning, but that wouldn’t have conflicted with the effort to pass health reform — and anyway, I don’t hear many of the “focus” types saying that. So what do they mean? Obama should have gone around squinting and saying “I’m focused on the economy”? What would that have done?

Look, governing is not just theater. For sure the weakness of the recovery has hurt Democrats. But “focusing”, whatever that means, wouldn’t have delivered more job growth. What should Obama have done that he actually could have done in the face of scorched-earth Republican opposition? And how, if at all, did health reform stand in the way of doing whatever it is you’re saying he should have done?

I have seen no answer to these questions.

I am going to have to disagree slightly. Politics is, in large part, about identity and I don't think Obama did nearly enough to show he identifies with the working class. Fighting for their needs publicly and loudly probably wouldn't have made any difference in terms of fiscal policy, but doing more to signal that he identifies with their struggles might have helped at the ballot box. I don't see how it could have hurt. Yes, various jobs programs were proposed along the way, and nothing came of them for the most part, but there just wasn't enough fist-pounding on this issue by the administration.

There’s no reason to take these complaints seriously... Polluters and their political friends have a track record of crying wolf. ... Again and again, the actual costs have been far lower than they predicted. In fact, almost always below the E.P.A.’s predictions.

So it’s the same old story. But why, exactly, does it always play this way? ... When and why did the Republican Party become the party of pollution?

For it wasn’t always thus. The Clean Air Act of 1970 ... was signed into law by Richard Nixon. (I’ve heard veterans of the E.P.A. describe the Nixon years as a golden age.) A major amendment of the law, which among other things made possible the cap-and-trade system that limits acid rain, was signed in 1990 by former President George H.W. Bush.

But that was then. Today’s Republican Party is putting a conspiracy theorist who views climate science as a “gigantic hoax” in charge of the Senate’s environment committee. And this isn’t an isolated case. ...

So what explains this anti-environmental shift?

You might be tempted simply to blame money in politics... But this doesn’t explain why money from the most environmentally damaging industries, which used to flow to both parties, now goes overwhelmingly in one direction. ...

One answer could be ideology... My guess, however, is that ideology is only part of the story — or, more accurately, it’s a symptom of the underlying cause...: rising inequality. ... Any policy that benefits lower- and middle-income Americans at the expense of the elite — like health reform, which guarantees insurance to all and pays for that guarantee in part with taxes on higher incomes — will face bitter Republican opposition.

In the case of the new ozone plan, the E.P.A.’s analysis suggests that, for the average American, the benefits would be more than twice the costs. But that doesn’t necessarily matter to the nonaverage American driving one party’s priorities. On ozone, as with almost everything these days, it’s all about inequality.

Economists vs politicians: ... I suspect that there is a greater distance now between the political parties and economist than there has been for years. ...

You might think this isn't a wholly bad thing. Many ideas are not worth adopting ... This, however, doesn't justify politicians' lack of interest in the settled, established knowledge that economists do have.

So, where is there such a gap between politicians and economists?

The fault might partly lie with economics. Many academics aren't as interested in closing the gap between academia and the "real world" as they should be. At least some of the discipline was discredited by the crisis, and I get the feeling that there aren't so many good new policy-relevant ideas now.

It might be that the voters are to blame. Maybe they don't want serious politicians who are interested in good ideas but rather, in our narcissistic age, they simply expect their demands to be met, however unreasonable. But is this the whole story? Janan Ganesh thinks not:

There is...an unsatisfied demand for seriousness and leadership. Most people do not vote Ukip or parse an MP’s tweet for class meaning. The flight to frivolity in public life is not the voters’ doing. Many are in fact waiting for a leader to arrest it.

This leaves a third suspect - the media. ... Political journalists have been complicit in creating a hyperreal bubble of mediamacro which perpetuates witless ideas (such as conflating the economy with the deficit) to the exclusion of such good ones as might exist.

I'm not sure, then, how exactly to apportion blame for the divorce between politicians and economists. But I do suspect that, net, it is a bad thing.

[I left out his examples of "established knowledge that economists do have".]

Wednesday, November 26, 2014

Keynes Is Slowly Winning: Back in 2010, I had a revelation about just how bad economic policy was about to get; I read the OECD Economic Outlook, which called not just for fiscal austerity but for interest rate hikes — 350 basis points on the Fed funds rate by the end of 2011! — because, well, because.

Why does the tide finally seem to be turning? Partly, I think, it’s just a matter of time; after six years it’s becoming hard not to notice that the anti-Keynesians have been wrong about everything. Europe’s slide toward deflation makes it even harder to deny the realities of liquidity-trap economics. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous.

All of this may be coming too little and too late to avoid policy disaster, especially in Europe. But it’s something to cheer, faintly.

Understanding George Osborne: Yesterday I spoke at the Resolution Foundation’s launch of their analysis of the UK political parties’ fiscal plans post 2015. I believe this analysis shows two things very clearly. First, there is potentially a large gap between the amount of austerity planned by the two major parties. Second, George Osborne’s plans are scarcely credible. They represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.

I would add one other charge - Osborne's plans are illiterate in macroeconomic terms. The UK economy desperately needs more growth. ...

In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne’s plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.

So why is the Chancellor proposing to make the same mistake twice? ...

I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I’m looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election. But this explanation would imply we have a Chancellor that quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said ...

The new fiscal mandate is expected to enshrine in law one area of common ground between the Tories and Lib Dems: that the cyclically adjusted current deficit should be eliminated by 2017-18.

This is imbecilic. ...

Now, you might think that, in saying all this I'm merely being a Keynesian.

Wrong. In fact, I'm writing in a Hayekian spirit. Hayek famously and correctly argued that economic knowledge was inherently fragmentary and dispersed and so central agencies could not possibly know very much. I'm echoing him. I'm saying that the OBR cannot know enough about the productive potential of millions of firms to know what the output gap is. And it hasn't got enough knowledge of the future to predict recessions.

In presuming otherwise, Osborne is thus not only anti-Keynesian, but anti-Hayekian. I thus agree with Simon - that he is illiterate and plain dumb.

Tuesday, November 25, 2014

How to think about “think” tanks: It is sometimes said that think tanks are good for democracy; indeed the more of them, the better. If there are more ideas in the public arena battling it out for your approval, then it’s more likely that the best idea will win, and that we will all have better public policies. But intuitively many of us have trouble believing this, have trouble knowing who is being truthful, and don’t know who to trust.

This battle of ideas, studies, and statistics has the potential to make many of us cynical about the whole process, and less trusting of all research and numbers. If a knowledgeable journalist like the Canadian Kady O’Malley expresses a certain exasperation that think-tank studies always back up “the think-tank’s existing position,” what hope is there for the rest of us? A flourishing of think tanks just let’s politicians off the hook, always allowing them to pluck an idea that suits their purposes, and making it easier to justify what they wanted to do anyways.

Maybe we shouldn’t be so surprised that think tanks produce studies confirming their (sometimes hidden) biases. After all this is something we all do. We need to arm ourselves with this self-awareness. If we do, then we can also be more aware of the things in a think tank’s make-up that can help in judging its credibility, and also how public policy discussion should be structured to help promote a sincere exchange of facts and ideas. ...

Monday, November 24, 2014

Rock Bottom Economics, by Paul Krugman, Commentary, NY Times: Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate ... more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more...

Everything changes when the economy is at rock bottom... But for the longest time, nobody with the power to shape policy would believe it.

What do I mean by saying that everything changes? As I wrote..., in a rock-bottom economy “the usual rules of economic policy no longer apply...” Government spending doesn’t compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets ... that they will push inflation up. “Structural reform,” which usually means making it easier to cut wages, is more likely to destroy jobs than create them.

This may all sound wild and radical, but ... it’s what mainstream economic analysis says will happen once interest rates hit zero. And it’s also what history tells us. ...

But as I said, nobody would believe it. By and large, policymakers and Very Serious People ... went with gut feelings rather than careful economic analysis. ...

Thus we were told ... that budget deficits were our most pressing economic problem, that interest rates would soar ... unless we imposed harsh fiscal austerity... —... demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.

We were also told repeatedly that printing money ... would lead to “currency debasement and inflation.” The Fed ... stood up to this pressure, but other central banks didn’t. ...

But... Isn’t the era of rock-bottom economics just about over? Don’t count on it..., the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time..., which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it. ...

This bodes ill for the future. What people in power don’t know, or worse what they think they know but isn’t so, can very definitely hurt us.

Friday, November 21, 2014

Suffer Little Children, by Paul Krugman, Commentary, NY Times: The Tenement Museum, on the Lower East Side, is one of my favorite places in New York City. It’s a Civil War-vintage building that housed successive waves of immigrants, and a number of apartments have been restored to look exactly as they did in various eras, from the 1860s to the 1930s... When you tour the museum, you come away with a powerful sense of immigration as a human experience, which — despite plenty of bad times,... was overwhelmingly positive.

I get especially choked up about the Baldizzi apartment from 1934. When I described its layout to my parents, both declared, “I grew up in that apartment!” And today’s immigrants are the same, in aspiration and behavior, as my grandparents were — people seeking a better life, and by and large finding it.

That’s not to say that I, or most progressives, support open borders. ...

But ... the proposition that we should offer decent treatment to children who are already here — and are already Americans in every sense..., that’s what Mr. Obama’s initiative is about.

Who are we talking about? First, there are more than a million young people ... who came — yes, illegally — as children and have lived here ever since. Second, there are large numbers of children who were born here — which makes them U.S. citizens, with all the same rights you and I have — but whose parents came illegally, and are legally subject to being deported.

What should we do about these people...? ... The truth is that sheer self-interest says that we should do the humane thing. Today’s immigrant children are tomorrow’s workers, taxpayers and neighbors. Condemning them to life in the shadows means that they will have less stable home lives than they should, be denied the opportunity to acquire skills and education, contribute less to the economy, and play a less positive role in society. Failure to act is just self-destructive.

But... What really matters ... is the humanity. My parents were able to have the lives they did because America, despite all the prejudices of the time, was willing to treat them as people. Offering the same kind of treatment to today’s immigrant children is the practical course of action, but it’s also, crucially, the right thing to do. So let’s applaud the president for doing it.

Tuesday, November 18, 2014

The Structure of Obamacare: The big revelation of this week has been how many political pundits have spent six years of the Obama administration opining furiously about the administration’s signature policy without making the slightest effort to understand how it works. They’re amazed and in denial at the suggestion that it has the same structure as Romneycare, which has been obvious and explicit all along...

So, why was Obamacare set up this way? It’s mainly about politics, but nothing that should shock you. Partly it was about getting buy-in from the insurance industry; a switch to single payer would have destroyed a powerful industry, and realistically that wasn’t going to happen. Partly it was about leaving most people unaffected: employment-based coverage, which was the great bulk of private insurance, remained pretty much as it was. ... And yes, avoiding a huge increase in on-budget spending was a consideration, but not central.

The main point was to make the plan incremental, supplementing the existing structure rather than creating massive changes. And all of this was completely upfront; I know I wrote about it many times.

Look, I understand why the hired guns of the right have to act ignorant and profess outrage. But I really am shocked at centrists who apparently thought they could opine on the politics of health reform, year after year, without taking a hour or two to learn how the darn thing was supposed to work.